(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)
9. Thrust II: Rakyat First – Restructuring and Reallocation
9.2 Managing Oil Wealth
Over-reliance on Oil and Gas
Malaysia is blessed with abundant natural resources. In particular, we are thankful that the country is rich in oil and gas, which created Malaysia’s sole representative in the Fortune 500, Petroliam Nasional Berhad (PETRONAS). Since the incorporation of PETRONAS Group 35 years ago, the Group has paid RM471 billion to the Government, in addition to bearing a cumulative gas subsidy of RM97 billion.
In the most recent financial year ending March 2009, PETRONAS achieved profit before tax of RM89.1 billion amidst the challenging economic backdrop. Of greatest importance was the fact that PETRONAS contributed RM61.6 billion to our national coffers in taxes, royalties, dividends and export duties last year. Contribution from PETRONAS Group alone was budgeted to make up some 46% of the Federal Government revenue for 2008. This represents a steep increase from approximately 20% in 2004. The heavier reliance on oil and gas industry for Malaysia over the years signals an alarming trend.
Despite the fact that the total Malaysia hydrocarbon reserves has increased marginally from 20.13 billion barrels of oil equivalent (boe) at January 2008 to 20.18 billion boe at January 2009, and the reserves replacement ratio (RRR) has improved from 0.9 times to 1.1 times during the same period, our reserves will inevitably run dry at some point. During an interview with Bernama in June 2008, the president and chief executive officer of PETRONAS Group, Tan Sri Hassan Marican said that “we will continue to produce for another 20 years or so.” In more immediate terms, “Malaysia will become a net importer when its domestic consumption, growing at six percent per annum, is expected to overtake national production in 2011.” Furthermore, increasing globalisation has intensified the competition among PETRONAS, oil majors and other national oil companies. This impact is particularly significant because international operations were both the Group’s biggest revenue generator as well as its fastest growing segment for the last two consecutive years. 42.1% of the Group’s revenue for FY2009 was derived from international operations, compared to 35.4% in FY2005. In order to maintain its competitive edge as a leading global oil player, it is crucial for the Group to channel its profit and investment to maintain the amount of extractable oil and gas reserves, to enhance its recovery ratio and to improve the reliability and productivity of its infrastructure.
However the Group’s investment capability and long term sustainability might be undercut by the declining share of profit for reinvestment and rapid-growing total payments to the Governments. In particular, profit available for reinvestment by PETRONAS has dropped from 42.5% in FY2005 to only 21.1% in FY2009. In terms of absolute value, it has dropped from RM28 billion in FY2005 to RM21.9 billion in FY2009. In the meantime, share of PETRONAS Group profit allocated to the Federal Government has increased from 44.1% to 65.4% over the same period.
As a result, the total payments by PETRONAS to both the state and federal governments have ballooned from RM32.1 billion in FY2005 to RM74.0 billion in FY2009. The frightful acceleration of dependence on our limited oil and gas resources places the country’s economy at great risks.
9.2.1 Capping PETRONAS profit contributions To tackle the over-reliance on oil and gas revenue, the DAP proposes that the PETRONAS Group sets the target to pay not more than 50% of the Group profit before tax, duties and royalties to the Federal Government from 2012 onwards. Through imposing this cap on the proportion of Group profit paid to the Federal Government, our nation would maintain the share of oil wealth to the Federal Government revenue at around 35%, which is coherent with the strategic goal of our nation to diversify its economy and revenue sources.
The cap imposed on the proportion of Group profit paid to the Federal Government would not compromise the fiscal strength in stimulating our national economy. The fact that Norway only derives approximately 30% of its national revenue from the petroleum industry despite its position as the third largest gas exporter globally provides an exemplary model for our nation to follow.
The cap would not only reverse the trend of over-reliance on exhaustible oil and gas resources, and hence catalyse the growth of other productive sectors of the economy, but also enable PETRONAS Group to boost its reinvestment ratio. The reserved profit endows PETRONAS with the flexibility and capacity to increase the share of profit reinvested to approximately 40% level. This will narrow the gap of reinvestment ratios among PETRONAS, oil majors, which reinvest 57.1% of their profits in average for FY2009, and other national oil companies, which channel an average of 72.9% of their profits for reinvestment in the same fiscal year.
Given the current challenging economic climate in Malaysia, the DAP understands the needs to stimulate and hasten our economy recovery through greater injection of our oil wealth. Therefore, the DAP proposes in this Budget that the PETRONAS Group channels 60% instead of 50% of the Group profit before tax, duties and royalties to the Federal Government for Budget 2010.
9.2.2 Optimizing Utilization of Oil Wealth Malaysia’s abundance of oil and gas resources is akin to striking lottery. Our nation must not fall into the trap of what economists call the “resource curse” in which countries devoid of natural resources fare better than countries better endowed. It is imperative for our nation to optimise its oil wealth, and utilise the resources in the best interests of the nation and the Rakyat. In light of this, the DAP proposes in this Budget that only a fixed value of RM30 billion, out of the total payment by PETRONAS to the Federal Government, will be channelled directly to the normal national budget. This figure shall be adjusted upwards in accordance to the country’s inflation rate for subsequent years. Any surplus of the total contribution to the Government by PETRONAS shall be legislated as below:
As an example, PETRONAS Group profit before tax, duties and royalties is forecasted to be RM84 billion for 2010 Budget. Based on the DAP’s proposal, RM50 billion (60% of RM84 billion) will be paid to the Federal Government. A fixed amount of RM30 billion out of the RM50 billion will be channeled directly to the normal national budget. The remaining amount of RM20 billion will be spent according to the proposed legislation, in which at least RM4 billion will be streamed each to Khazanah Nasional, National Stimulus Fund, and Human Capacity development (i.e. Education & Training) respectively.
9.2.3 Khazanah Nasional: Building New Capacities & Capabilities
9.2.4 National Stimulus Fund The National Trust Fund, or Kumpulan Wang Amanah Negara (KWAN), which was set up in 1988 under the Act 339 will be remodelled and substituted by the National Stimulus Fund.65 This new fund will be established to drive fiscal spending and to provide financial assistance to all Rakyat during economic downtimes when the GDP grows at levels below 2%. This fund will have a crucial role in stabilising revenues and helping all Rakyat to through economic hard times.
The DAP proposes to mandate the EPF as the manager and custodian of this newly established National Stimulus Fund. Guided by the clear mission of securing the continual prosperity and sustainability for our national economy, the EPF will channel this fund into stable long-term investments such as well managed funds.
In the years of booming economy and windfall revenues, the surplus payment from PETRONAS will be deposited in the National Stimulus Fund, which focuses on low risk investments with steady rate of return. This practice will not only better prepare our country for unforeseen circumstances and future uncertainties, but also prevent the scenario of overheating and overinflating our economy during good times. Based on the estimated revenue projections from PETRONAS, at least RM4 billion will be deposited into the National Stimulus Fund in 2010 based on the DAP Alternative Budget.
DAP believes that oil revenue windfall should be shared and enjoyed by all Rakyat in order to cultivate greater stewardship and to cherish the labour of all Rakyat. This sharing of wealth can best achieve its objectives by rendering financial assistance to all Rakyat directly during economy slowdown when our Rakyat need the support the most.
9.2.5 Human Capacity Development As revenue from oil and gas constitutes more than 40% of the overall Government budget, there is a serious challenge in sourcing alternative sources of revenue to sustain our Government expenditure at current levels. The most promising alternative source of revenue is encapsulated in building a strong base of human capital for our country. With the right quality of human capital, many countries around the world, which are deprived of natural resources, have recorded significant growth above and beyond what we have achieved.
In light of this, the DAP will legislate that at least 20% of the surplus payment from PETRONAS shall be allocated to enhancing human capacity, particularly in Education and Training, on top of their normal budget allocation. This will ensure that our windfall revenues will be productively invested in our most important assets, especially the young Malaysians. Based on the estimates of revenue from PETRONAS for 2010, at least RM4 billion will be additionally allocated towards projects involving human capital development.
The allocation will be spent to accelerate the process of revamping our educational system and elevating the quality of our Education and Training. We can model this spending after the Education Investment Fund of Australia, which provides significant capital investment in Australian higher education as well as vocational education and training. This Education Fund selectively finances innovative and transformative projects proposed by eligible education providers and research institutions that could help equip Australians with the high-level skills and knowledge necessary in an increasingly competitive global economy. Through proper implementation and execution of a similar programme, the declining quality of our education system can certainly be reversed.
9.2.6 Delivering State Oil Royalties as Legislated To prevent any unlawful dismissal of state governments’ claims on oil royalties and to protect the right of the Rakyat of the state, the state oil royalties will be paid directly to respective states based on the vesting deed agreement signed by the former PETRONAS chairman Tengku Razaleigh Hamzah, which “entitles the state to five per cent of any revenue derived from hydrocarbon deposits found on or offshore of the state.” Therefore, the state of Kelantan will receive its royalty as per the agreement signed on May 9, 1975 which amounts to approximately RM250 million per annum.